The M I C Solution

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 5 October 2012, 7.55 am, and Saturday, 6 October 8.35 am)

In 2008, a public danger involving tainted milk was discovered days before the Beijing Olympics began. As it would be bad publicity, the Chinese authorities hid the danger while babies continued to consume the deadly milk.

By the time the danger was revealed, six babies had died and about 300,000 seriously ill. In their attempts to look good, the Chinese authorities ended up looking bad.

It was also not an isolated case because many more food scandals have since appeared. The relevant authorities claim that they do not have the resources to address the issue. Disgusted, Chinese consumers have reacted by buying imported food. This has hit the Chinese food industry.

Like consumers, countries also react in ways that can lead to unintended consequences. The Asian Currency Crisis of 1997 has such a lesson to teach us.

In that Crisis, Asian central banks tried to use their foreign reserves to stop their currencies from plunging.

The Indonesian rupiah for instance, fell 30% in the first few months of the crisis. So dangerous was the social situation that 15 years ago this weekend, Indonesia had no choice but to seek help from the IMF.

There is a famous photo depicting Indonesia’s humiliation in the Crisis. In the photo, Michel Camdessus, the IMF Managing Director, had a stern face and crossed arms. He was standing over a seated President Suharto while he signed and handed over to the IMF Indonesia’s economic sovereignty.

For Asians, President Suharto’s humiliation and subsequent downfall symbolized the arrogance of the West. “Never again”, they told themselves, would they be humiliated like this.

To ensure that this would not be repeated, Asian countries reacted by exporting furiously to accumulate foreign reserves in the following years.

Their excessive foreign reserves subsequently created the global imbalance, whereby Asian exporters saved too much and Western countries spent too much. This had the unintended consequence of paving the way to the US housing bubble and the current Euro Crisis.

Like President Suharto in 1997, Spanish PM Rajoy finds himself in the same situation today. If he asked for help, he would be admitting that his government cannot cope. Instead of the IMF in 1997, we have the rich countries of northern Europe standing stern faced over the poor southern Europeans.

The Asians in 1997 could export their way to prosperity. Unfortunately, with the single euro currency, this avenue is not open to the southern Europeans. They will face prolonged spending cuts, which will be bad for the Eurozone and the world.

The US economy should step in to fill this spending gap. But this is not going to happen because come January next year, previously agreed spending cuts and tax hikes will kick in. This will remove more than US$1 trillion from the US economy over the next decade.

The rich Asian region, led by China, is the only region left which can still spend. But will the next generation of Chinese leaders open the wallet? Clearly, the export model doesn’t work anymore.

Instead of more buildings and highways, China should spend more on developing its soft infrastructure, for a better quality of life. Yes. This would include addressing the food scandals.

If China doesn’t come up with its “MIC” solution, the world will slog through a long slow-growth period. Chinese food scandals will continue and we will avoid foods which are labeled “MIC”.

By the way, “MIC” means Made In China. We can add this to Singapore’s growing list of abbreviations, which in recent days have included “MU”, “DIY”, and “SP”.